Brawley: P3s Tax the Public to Profit Govco

Today Representative Robert Brawley (Robert.Brawley@ncleg.net) made the following post regarding the current push to privatize roads via public-private-partnerships (P3s):

P3s Tax the Public to Profit Govco

As an American and lifelong Republican, I am all for free markets and business success. What I do not stand for is propping up industries or companies that cannot survive and prosper on their own merits. If you succeed by building a better widget or offering a better service than your competitor, hats off to you. However, if your business model is based on deceit, spreading propaganda and riding on the coattails of American taxpayers, shame on you. Unfortunately for millions of Americans, legislators are selling-out America’s prime infrastructure assets to corporations and private entities looking to capitalize off of the public and America’s infrastructure that was purchased, built and maintained with taxpayer funds. Whether it is roads, water systems or utilities, corporations and private entities are pervasively colluding with politicians to garner the acceptance of Private Public Partnerships (P3s).

 

An article published in the November/December 2012 issue of Dollars & Sense magazine by Darwin Bond-Graham highlights many of the problems with P3s. The concerns quoted below have been raised by concerned citizens on both sides of the aisle. Corporate management of people and public services is an unsavory idea regardless of your political affiliation.

In 1995, California granted a private company the right to construct express toll lanes along the State Route 91 freeway in Orange County, a region inhabited by millions, with some of the heaviest traffic flows in the nation. This was the first modern privatized highway in the United States. The California Private Transportation Company (CPTC), a partnership of three corporations—Level 3 Communications, Granite Construction, Inc., and the French toll operator Cofiroute SA—completed the project with $130 million in mostly privately sourced money. To recoup this expense, and to make a profit, CPTC was given a 35-year concession to operate the toll route. State leaders promised that the private company would provide greater efficiency and savings, and that the public would benefit from clear and safe roads, even during a time of government budget constraints.

It did not take long for things to unravel. The SR-91 toll lanes did not unclog what local traffic reporters referred to as the “Corona Crawl,” so state and local officials sought to expand nearby highways to ease worsening congestion and improve safety. When transportation offices announced the improvement plans, CPTC unexpectedly filed a lawsuit, citing a non-compete clause in their contract to build and operate the toll lanes. The people of California were legally blocked from improving their highways because it could reduce private profits. In 2003, the Orange County Transportation Authority was forced to purchase the SR-91 toll lanes for $208 million to put an end to the fiasco.

In 2004, California’s state legislature halted the experiment in privatizing highways. But that did not stop other states from pushing forward with privatization. In Virginia and Texas, several major privatized freeways were built in the 2000s. Then, in 2009, things came full circle. California once again authorized so-called public-private partnerships to procure highways and other public goods. Although privatization of transportation projects has a tarnished record, owing much to California’s costly experiments over a decade ago, all across the United States major highway and other infrastructure upgrades are once again being handed over to private investors, now under the moniker of “public-private partnerships,” or [P3s].

[A P3] is a rebranding of privatization. The phrase purposefully evokes a win-win scenario involving equal “partners” working toward a common goal. Government leaders have been sold this new kind of privatization as a solution to declining tax revenues and borrowing capacity, while private companies claim to be offering their expertise and capital in a spirit of public service.

Let’s be honest. Private companies do not exist to give away goods or services. Their goal is to earn a profit and return substantial gains to their investors. That is a worthwhile goal from a business standpoint; however, it is a conflict of interest when companies are tasked with supplying essential public services. In contrast, government services are designed to serve the public – not profit from the public. You cannot serve the public’s basic infrastructure needs in an equitable fashion if your goal is to make a profit.

[A P3] is the result of a long ideological campaign against public-sector unions and “big government,” which conservative think tanks, pundits, and politicians blame for growing deficits and crumbling infrastructure. This worldview, meanwhile, hails private companies and the private profit motive as the bearers of efficiency and fiscal discipline.

P3s do not reduce “big government”, they only increase it with the insertion of “big business”. Private companies can be just as inefficient as the public sector, and are no less prone to project overruns or management mistakes. Whether it’s a government project or a corporation, you still have human beings at the helm. Greed, human error and mismanagement exist in both the private and public sectors – just ask Enron or Lehman Brothers.

Finally, [a P3] is obviously a money-making opportunity. It is propelled by an infrastructure-industrial complex composed of global construction corporations, investment banks, private-equity firms, and elite law firms organized as vertically integrated consortiums. Allied through their own trade associations, they are actively pressing for new laws to expand the types of public infrastructure from which they can extract profits, and in recent years they have been quietly succeeding.

The American public depends on the equitable accessibility to basic needs, such as water, roads and emergency services. Seeking ways to profit from the public for services that they cannot pick and choose from (such as the airport they use, the interstate they drive on, or the water they drink) is essentially forcing the public to buy your product – that is not a free market practice.

The main source of project financing, however, comes from investment banks that lend to the consortium partners. P3 proponents claim that this private financing source is a solution to the budgetary constraints of governments that face huge backlogs of deferred infrastructure investment. A recent Congressional Budget Office (CBO) report, however, shows the flaw in this argument: “The case is sometimes made that using funds from private capital markets to finance roads can increase the resources available to build, operate and maintain roads,” the report notes. “But the sources of revenues available to pay for the cost of a highway project —whether it uses the traditional financing approach or a public-private partnership—are the same: specifically, tolls paid by users or taxes collected by either the federal government or by state and local governments.”

Whether it’s through tolls or taxes, the source of revenues are still people. P3s create fertile ground for monopolistic and corporate cronyism practices. Government that is By the People and For the People should steer clear of partnerships that increase the gains of the private sector at the expense of the public. Socialist and non-democratic countries do P3s very well, which is another example why they are an un-American practice.

I ask my fellow legislators and the public to speak up against plans to implement P3s for our roads and other public infrastructure assets that are essential to a free society.

State Representative Proposes Funding Solution for Roads

With North Carolina’s toll lane scheme coming under increasing fire, some elected leaders have recently taken to demanding alternative funding options.  As we’ve pointed out previously, bloated toll lane projects like the proposed I-77 HOT lanes are not the solution, and no toll lane in a metropolitan area less than 2.5 million has even covered its operating costs.

Yet, in defiance of history and fiscal gravity, some elected leaders continue to push this financially irresponsible scheme.  So it’s especially refreshing- and heartening- when a state-level representative rises up and proposes a solution rather than demanding one from his constituents.  Earlier today, Rep Robert Brawley (Robert.Brawley@ncleg.net) made such an announcement:

Representative C. Robert Brawley, North Carolina House of Representatives
June 21, 2013

A Better Option Than Toll Lanes

During this session the General Assembly has addressed a number of pivotal issues for North Carolina. One of the very critical and controversial issues that I have spoken out about is the NCDOT’s plans to contract with private tolling companies to use HOT lanes on our existing highways. HOT lanes are toll lanes that are built and operated under 50-plus year contracts with private, for-profit tolling companies. Drivers are charged to use the lanes and will receive a bill each month. The fees have no cap as to how high they can go. Currently, HOT lane fees/taxes in other states range from .20 to $1.00 a mile or more.

Overwhelmingly, citizens are opposed to toll lanes – and for good reason. The cost to use them is unaffordable for most people. And they do not reduce congestion, but instead they actually increase traffic since HOT lanes take over existing HOV lanes. Furthermore, HOT lanes are known to push drivers off of the highways and onto neighborhood roads. I and many others are also concerned about the state being put in a position to buy-out private tolling companies when and if projects fail for a variety of reasons.

Obviously the State of North Carolina has a road funding shortfall as a result of gas tax funds for many years being diverted for other uses besides roads. To make up for this shortfall, we’ve been told that there is no other option but to accept HOT lanes. I believe we do have another option and one that will not cost drivers and truckers of I-95, I-40, I-85, I-77, 485 and Highway 74 thousands of dollars a year in tolls. This solution will not drive up the price of goods because of increased trucking costs. It will not force drivers into more traffic. And, it will not put the state at the risk of a buy-out of a tolling company. Doing something now rather than after I-77 is tolled helps all of us. After I-77 is tolled, we will pay a toll plus added taxes.

What I propose for addressing the shortfall and reducing overall and long-term expenses for the people of North Carolina is a threefold plan. First, we reduce inspections to every two years instead of every year. That would save drivers on average $14 dollars a year. Second, we make up for the road funding shortfall for road projects throughout the state by raising the annual registration fee by $50 per vehicle. And three, by better managing our road funds and eliminating wasteful spending together with the Governor’s strategic transportation plan, we should be able to meet our transportation needs.

That $50 dollars a year is money I’d rather see people keep. However, compared to the options of not doing this, $50 a year will be a lot less than increased gas taxes or HOT lanes that cost the public and truckers thousands of dollars a year. An increase of $50 per year for each vehicle registration multiplied by the 8,740,023 vehicles registered in North Carolina today would generate approximately $437 million dollars a year for our road needs.

Revenues from toll lanes and roads are a gamble; not a known quantity. We need to cover the cost of our roads with dependable revenue sources and not speculative toll projects. Registration fees are a fixed and dependable source of funds. The choice of not doing anything is not an option either. Time in traffic equals lost wages, lost productivity, and higher cost of services and goods. The stop and go of congestion also increases gas usage and emissions. Poor roads and expensive tolls impact even non-drivers, and especially the poor. Trucks cannot use HOT lanes, and the increased traffic in regular lanes will only make it more expensive for truckers to bring goods to customers. The NCDOT’s costly toll lane plan benefits only one group of people – and that is the tolling industry.

If North Carolina is going to be a desirable and affordable state to live in and conduct business, reliable and cost-effective solutions are needed to fund our roads. Gambling on speculative toll road projects is neither reliable nor practical. If we dedicate registration fees to road projects only, we can meet our funding needs. We will be able to take care of our roads – from rural highways to urban interstate corridors, and once again be The Good Roads State.

 

Toll Lane Financials

Some elected officials justify toll lanes as a means to generate revenues for roads.  They note gas tax receipts are expected to decline while road construction needs will increase.  These trend lines are headed in the wrong direction and to reverse that, these advocates point to toll lanes (and roads) as an important revenue-raising tool.

This implies that toll lanes must not only cover their operating costs, but also bring in enough revenue to pay for the lane itself. Ideally they would generate a surplus that can be used as a source of funding for other transportation needs.  For I-77, the current plan is a $550M project consisting of toll lanes for 27.5 miles from downtown Charlotte to the middle of Iredell County.  The project is proposed as a public-private partnership, where the NCDOT would lease the lanes to a private company under a 50 year contract.  The $550M includes $170M in public funds, and the rest would be financed through a combination of private debt and equity.

Before we begin our analysis, a word about sources.  Population data comes from the U.S. Census Bureau.  The financial data was taken from the 2012 Managed Price Lane Guide published by the Federal Highway Administration.  This document is basically a how-to manual for getting toll lanes built.  It was written by Parsons-Brinkerhoff, an engineering consulting firmly deeply involved in the toll lane business.  Among its authors is David Ungemah, the featured speaker at a local toll lane information session.  He is nationally recognized as a “managed lanes expert.”  Thus, any bias in the information presented is in favor of toll lanes.

With that in mind, we’ve undertaken a study of existing toll road financials.

Revenues

The chart below plots annual toll revenues vs metropolitan served area (MSA) population for 11 toll lanes currently in operation. In addition, we plotted the required Revenuesrevenues ($20M) for the proposed I-77 toll lanes.  Toll lane experts have placed this number as high as $30M; we erred to the low side.

A couple of observations.  First, toll revenues are roughly correlated to the MSA.  On the low end are the I-15 lanes through Salt Lake City with a metropolitan area of approx one million and revenues of $500K.  On the high side- indeed an outlier- is SR 91 connecting North Orange County to Riverside.  Combined, over 7 million people live along this route, and toll revenues were $41M.  We’ll discuss SR 91 in more detail in a moment.

This correlation is not surprising as urban sprawl is necessary for the toll lane model to work.  As we have stated elsewhere, toll lanes rely on congestion in the general purpose lanes to entice people to pay the toll.  Robert Poole of the Reason Foundation affirms this in a recent article he wrote examining toll revenues in Miami.  (Poole invented the term “HOT lanes” and is widely viewed as the father of the concept.)  Poole states:

I could imagine that a managed lane project in Minneapolis or Salt Lake City, say, might not relieve enough congestion to cover its costs out of toll revenues. But congestion on I-95 in Miami was nearly as bad as on the Los Angeles freeways, and the prices charged during peak periods are considerably higher than on many other managed lanes around the country.

In order to cover its costs, Poole implies, toll lanes must be in a large metropolitan area.

The second observation is that the required revenues for I-77 are out of proportion with the region’s population.  I-77 toll revenues will need to surpass those in Seattle, San Diego, Houston, Atlanta, and Miami, among others.  In fact, the I-77 project would need to be the second-highest grossing toll lane in the country.  It would require revenues greater than the eight lowest-grossing toll lanes combined.  This should be especially concerning in light of the fact that the project’s northern terminus (Iredell) has the smallest population (160K) of any of the existing toll lanes.

Operating Income

Operating Income is defined as revenues minus operating costs and does not include debt repayment.  Whatever is left over from operating expenses is what is available to pay for the capital cost of the project.  Toll lanes incur several operating costs that are unique to toll lane operation.  Among these are advertising, toll billing, toll collection, credit card fees, toll enforcement, occupancy enforcement, administration of the tolling authority, insurance claims and premiums, and ROI to private equity and debt investors.  General purpose lanes incur none of these.

The chart below shows annual operating income vs population, with projects sorted in order of increasing population.  Of the 11 projects, 7 have negative operating income.  IncomeThree generate significant positive income and one generates a modest income.

With one exception, no toll lane serving a population of less than 5.5 million currently covers its operating cost.  The exception (Denver) is an HOV-HOT lane conversion with a modest capital cost of $9M.  It was built with public funds and is run publicly, thereby avoiding some of the expenses previously mentioned.  The other HOT lanes with positive income are in Houston, Miami and Riverside/NOC.  SR 91 (Riverside/NOC) generates a significant income of nearly $20M.  This stretch of road is ten miles long and serves the relatively affluent North Orange County and more working-class Riverside.  The total served population is over 7 million and traffic on this road is over 300K vehicles per day, about twice what the busiest freeway in North Carolina carries.

However, even this “success” story is not without a cautionary tale.  The project originally opened in 1995 as a private, for-profit investment at a cost of $135M.  When the state tried to make improvements to ancillary roads, the operator sued, citing a clause in the contract that would prevent the state from making improvements that would ease congestion and impact toll revenues.  In 2003 the Orange County Transportation Authority bought the project back for $207M, 50% more than its original cost.

I-77 is not included here because the financials are not yet public.  At 27.5 miles the I-77 toll project would be the second longest in the country, so operating costs can be expected to be on a par or greater than those currently in existence.

Capital Cost

The chart below shows the total project capital costs.  I-15 in San Diego is the highest, Capitalat $1.3B.  The project was financed through general bonds issued by the state of California.  This differs from the proposed financing in North Carolina, where bonds will be issued using anticipated toll revenues as surety (“toll revenue bonds”).  Implicit in the San Diego project is the consideration that toll revenues will never be sufficient to retire capital cost.  Conversely, as we reported here, North Carolina plans to issue hundreds of millions in toll revenue bonds.  In fact, by the end of FY 2015, North Carolina will have issued over $2B of these types of bonds.  These will be used for toll road construction (not toll lanes), but proponents of this method should take heed that even in Southern California, tolls are not viewed as a source of additional revenue.

The variation in capital costs are largely due to whether the project is a conversion of an existing lane or an entirely new project.  Houston, Riverside/NOC and Miami are new construction while the remainder are conversions of existing HOV lanes.

Of course, new construction is significantly more expensive than conversions.  I-77 is primarily new construction (10 lane-miles out of 90+ will be HOV conversion), and this is reflected in the project’s capital cost of $550M. The I-77 project would be among the most expensive currently proposed, and more expensive than any toll lane financed through toll revenue bonds except the Capital Beltway in DC.  (The recently opened Capital Beltway cost over $2B.  Operating financials are not yet available.)

As far as the implications for the rest of North Carolina, I-77 has the only HOV lanes in the state.  Therefore, building toll lanes will require either new construction- and the associated expense- or conversion of existing general purpose lanes.

Superlatives

Compared to projects in the rest of the U.S, I-77 toll lanes would be:

  • the second-highest grossing to make the project financially viable
  • the second most expensive project financed through toll revenue bonds
  • the second longest project in terms of miles
  • the first to have four toll lanes beside four general purpose lanes
  • located in the second smallest metropolitan area

In addition, I-77 toll lanes would be North Carolina’s first:

  • privately operated toll lane
  • toll lane or road to be operated on a for-profit basis
  • road under a 50 year contract

Historically, no toll lane:

  • serving a population the size of Mecklenburg-Iredell has ever had a positive operating income
  • has ever repaid a debt obligation as large as the proposed I-77 project, regardless of metropolitan population

Conclusions

The proposed I-77 project therefore requires revenues and income that have been historically unattainable.  This raises an obvious question:  shouldn’t the bond underwriters- the people who do this for a living- walk away from this?  When we were in Raleigh we asked this question.  The answer was if they do not think the project is viable, they will simply not fund the project.

Not so fast.  As we have pointed out previously, under the terms of the existing contract the taxpayer will be responsible for all but the equity portion of the total project cost.  (Equity is typically about 20% of the total project.) If the project fails, advocates tout that taxpayers could buy the project for “pennies on the dollar.”  To most people, eighty cents on the dollar is a lot of pennies.

Even if that were the case, the toll lane project requires several improvements that are otherwise unnecessary.  Foremost among these are the replacement and/or construction of 9 bridges.  According to the NCDOT none of the existing bridges require replacement.  So taxpayer money that could be spent elsewhere would instead pay for replacing structurally sound bridges.

The above analysis shows that North Carolina lacks both the population centers and existing infrastructure of readily-convertible lanes to make toll lanes financially viable. If we pursue this route the scenario for North Carolina is one of high capital costs, low revenues, and negative operating income. Indeed, rather than generating additional income for roads, toll lanes pose a substantial risk of making our funding problem worse.

Toll lanes may work elsewhere, but they should be removed from consideration in North Carolina.

House Budget Includes $1.4 Billion for Toll Roads

So often in this debate we’ve heard elected officials say we need to find new sources of funding for roads.  With vehicles getting better fuel economy, gas tax receipts are projected to decline by about 2% annually.  And with more people moving to the state, the strain on our infrastructure will be even greater.

Before we get to the budget, we need to point out something: there is but one source of funding for roads.  It’s us- the people- who ultimately pay.  Whether that comes from taxes or tolls, it’s still pulled from the same wallet.  For the I-77 HOT lanes, NCDOT officials tout “we’ll get $3 of infrastructure for every $1 we spend” because a private company is putting up the difference.

This is simply not the case.  The private companies are not donating anything- they expect to be repaid with interest.  In the end, if there’s $3 of infrastructure spent, we’re the ones paying for it.  So the issue is not finding “new sources of revenues,” but rather using the one source we have most efficiently.

Which brings us to the recently passed house budget.  Buried in the back are a couple of line items for the Turnpike Authority (NCTA), the entity chartered with building toll roads.  For the 2013-2014 fiscal year, they’re slated to receive $154M.  For FY 2014-2015, the number is $1.4 billion.

This is a staggering number, especially in light of the fact that fuel tax receipts in 2013 are projected to be around $1.8 billion in total.  How are we able to fund $1.4 billion for toll lanes alone?

The answer is, in a word, debt.  The budget shows a line item of $1.4 billion for “requirements,” and right below it another line item for $1.4 billion in “receipts.”  So the plan is, starting in July 2014, the state will issue toll revenue bonds in the amount of $1,404,739,602.

This is in addition to the $788 million in debt the NCTA issued last year.  How efficiently has the NCTA used that borrowed money?  The first (and only) project they’ve completed is the Triangle Expressway, at a cost of $1billion.  In 20 years it is projected to carry half the traffic I-77 does today.  You can read more about it here, but suffice it to say if we’re in a funding bind we should not be spending a billion dollars on a road few people use.

Above all, let’s remember tolling- and the debt issued to enable it- is not a “new source of funding for roads.”  Rather, it’s putting it on our children’s credit card.

Update: spelled out “billions” and “millions” to avoid any confusion.